Many different scenarios may present themselves with family-owned or small businesses during a divorce. A spouse may be a minority owner in a family-owned or small business, but have only little or no involvement in the business. This spouse often lacks "control" over the entity. Rather, he or she has to share power or even be subject to the decision making of other partners or family members who are also involved in the business. In addition to a lack of control, this spouse may also lack the ability to liquidate their interest. A willing buyer will not pay full value for a minority share in a small or family business. This may result in lowering the value of this spouse' interest in the business by applying both "minority" and "lack of marketability" discounts (the former reflecting the lack of control; the latter, the lack of liquidity).
In dividing small businesses, courts generally try to disentangle the parties by awarding one party the interest in the business, even if jointly owned by both spouses. Generally, the other spouse receives a "buy-out" of their interest with payments over a set duration of time if the community assets are not sufficient for an offset of the business interest value.
Each business is complex, consisting not only of tangible assets like
buildings, bank accounts, inventory, tools, fixtures, furniture and
machinery, but also perhaps intangible ones such as mortgages, leases,
patents, trademarks, unlisted stock, skilled labor, accounts receivable
and most notably, "goodwill."
There are numerous approaches to valuing a business, including appraising the assets of the business, looking at comparable sales of like businesses or determining value based on the historic earnings of the business. Many times, the initial formation documents of the business may suggest an appropriate method for determining the value of a member' interest or shares, and provide restrictions on the transfer of the interest. Other important factors to include as part of the analysis are whether the business was started before the marriage or if the ownership interest was gifted to a spouse by his or her family. These factors could all impact the valuation.
In cases involving small and family-owned businesses, it is important to hire a lawyer who has experience with business valuation issues and to associate with an expert in the field of business valuation to accurately determine the fair market value of the business interest and the appropriate method for valuation.Link to the online article HERE.